The first quarter for banks was marked by a more dovish Fed, government shutdown woes and an expected drop in trading revenues. However, corporate tax cuts work in favor of banks. On that note, let’s take a look at banks that are likely to come up with encouraging numbers in the first-quarter earnings season.
Fed’s Dovish Stance Puts Pressure
So far this year, the broader S&P 500 has sprung back after a sell-off last December, increasing 13.6% and also registering its biggest quarterly jump since 2009. However, the same cannot be said about the financial sector. Major banks, in particular, have underperformed the broader equity market; gaining 10.6% in the said period after dovish comments from the Fed that boosted other sectors became a concern for them.
Fed officials agreed on remaining patient with respect to raising rates this year after global growth worries gripped investors. Inflation, by the way, has remained relatively contained, supporting the case for the Fed to hold off further rates. Such accommodative measures, at least for the time being, might dent banks’ profits in the first quarter. After all, low interest rates affect bank profits as they decrease the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Flattening Yield Curve: A Nightmare
A global slowdown, in fact, affected the 10-year treasury yield. The yield curve inverted on Mar 22, 2019, for the first time since 2007. This means that rates for long-term bonds, especially, 10-year Treasury yields slipped below short-term bonds. And in the process, the benchmark bond yield touched a 15-month low in the first quarter.
The flattening yield curve is certainly bad news for bank stocks. Needless to say, it narrows the gap between the interest banks pay depositors and the interest they charge from consumers. Chuck Carlson, CEO at Horizon Investment Services in Hammond, Indiana, added that bank estimates are currently going down due to the flattening of the yield curve and “there is an underlying concern about loan growth.”
Shutdown Woes, Drop in Trading Revenues
A partial government shutdown in January along with expected drop in trading revenues are compelling analysts’ to trim first-quarter bank earnings estimates. The U.S. government shutdown wasn’t good news for banks. After all, 800,000 federal employees aren’t getting paid, leaving several of them unable to pay mortgages and other liabilities.
Trading activity in the fourth quarter of 2018, by the by, suffered with total trading revenues declining 13% due to poor performance by the fixed income segment. Unfortunately, trading revenues in the first quarter are expected to remain low as client activities are yet to fully jump back to lofty levels. Brian Kleinhanzl, investment banking analyst at KBW said that year-over-year revenues from equities and fixed income, currencies and commodities trading are anticipated to drop 15% in the first quarter.
On the More Positive Side
The tax overhaul, however, has been a boon for banks. The reduction in corporate tax rates to 21% from 35% helped banks’ bottom line grow significantly. In fact, banking behemoths collectively reaped more than $9 billion from the tax cut policy during the first nine months of 2018, per analysis by the Wall Street Journal. JPMorgan Chase CEO Jamie Dimon also recently informed investors that bank profits got a big boost last year from corporate tax cuts. And it is widely expected that tax cuts will continue to have a positive impact on bank earnings this quarter.
Further, an array of initial public offerings (IPO) can be a source of profits for many banks. Analysts also predict that banks in the mobile payments space will report strong results. Also, an increasing number of consumers are adopting financial technology to cover varied expenses.
5 Bank Stocks to Buy Heading Into Q1 Earnings
The aforesaid factors will somehow help banks stay afloat this earnings season. For the Finance sector, to which the Major Banks industry is the biggest contributor, total first-quarter earnings are expected to grow 0.5% from the same period last year on 6.4% higher revenues.
This calls for investing in banks, which are expected to report a significant uptick in first-quarter earnings. These stocks have a positive earnings surprise and are more likely to positively surprise in the future. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Franklin Financial Network, Inc. (FSB - Free Report) operates as the bank holding company for Franklin Synergy Bank that provides banking and related financial services to small businesses, corporate entities, local governments, and individuals. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 2.3% in the past 60 days. It has an average positive earnings surprise of 5.8%. The company is expected to report earnings results for the quarter ending March 2019 on Apr 24.
Fifth Third Bancorp (FITB - Free Report) operates as a diversified financial services company in the United States. The company's Commercial Banking segment offers credit intermediation, cash management, and financial services. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 0.7% in the past 60 days. It has an average positive earnings surprise of 8.5%. The company is expected to report earnings results for the quarter ending March 2019 on Apr 23.
Civista Bancshares, Inc. (CIVB - Free Report) operates as the financial holding company for Civista Bank that engages in the community banking business in Ohio. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 4.6% in the past 60 days. It has an average positive earnings surprise of 10.5%. The company is expected to report earnings results for the quarter ending March 2019 on Apr 26. You can see the complete list of today’s Zacks #1 Rank stocks here.
Fulton Financial Corporation (FULT - Free Report) operates as a multi-bank financial holding company that provides banking and financial services to businesses and consumers. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.7% in the past 60 days. It has an average positive earnings surprise of 14.2%. The company is expected to report earnings results for the quarter ending March 2019 on Apr 16.
First BanCorp. (FBP - Free Report) provides a range of financial products and services to retail, commercial, and institutional clients. It currently has 10 branches in Florida. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 4.1% in the past 60 days. It has an average positive earnings surprise of 18.7%. The company is expected to report earnings results for the quarter ending March 2019 on Apr 26.
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